If you’re operating a minority-owned business, you know all too well the challenges and opposition you face on a daily basis, especially when it comes to securing financing. Fortunately, there is a growing effort to offer assistance to members of disadvantaged groups who want to start or grow their businesses, including more access to small business loans. Use this guide to learn about resources and funding options available to your minority-owned business.
What are Minority-owned Businesses?
Just exactly what defines a minority-owned business? Across all U.S. industries, a business qualifies as minority-owned if it is at least 51% owned and operated by people of certain ethnicities. Business owners must be Black, Hispanic, Asian-Pacific, Subcontinent Asian American, Native American or Alaskan Native. To secure funding from some programs, you first must receive certification that your business is minority-owned.
The term “disadvantaged” is used rather than “minority” to include women, military veterans and others. Disadvantaged groups have been subjected to racial or ethnic prejudice or cultural bias in American society outside of their control and through no fault of their own. The 2020 Annual Business Survey from the U.S. Census Bureau revealed that about 18.7% of U.S. businesses are minority-owned. That’s just over 1 million businesses. About 21% of businesses, or 1.2 million, we’re owned by women, and just 5.7%, or 331,000, we’re owned by veterans.
Who Can Apply for Minority Business Loans?
Small business owners that fit the criteria can apply for minority business loans. Depending on the type of small business loan you want, you may need to demonstrate strong business revenue and creditworthiness, in addition to the qualifications of ethnicity listed above. As a minority-owned business, you may have a hard time getting financial assistance from banks, credit unions and other traditional institutions.
What Loans are Available for Minority-owned Businesses?
There are many types of loans available for minority-owned businesses. The key is finding a lender who does not have an unconscious bias against minorities. Also, you may not have a long work or banking history, and some lenders don’t provide financing to small business owners with bad credit scores.
SBA Microloan Program
The SBA microloan program is open to all business owners, not just minority-owned businesses. It’s important to note the funding does not come from the government but rather from lending institutions approved to offer the loans guaranteed by the U.S. Small Business Administration. In some cases, the SBA microloan program is available to non-citizens authorized to be in the U.S. on a work visa. As the name suggests, SBA microloans are smaller and ideal for startup businesses and short-term funding needs. You can borrow up to $50,000 with an SBA microloan and expect interest rates to be about the same as you would pay on a credit card. Use the financing for equipment, supplies, inventory, and working capital for just about everything except paying for real estate. Depending on how much you borrow, you may not need to offer collateral for an SBA microloan.
SBA 7(a) Loans
SBA 7(a) loans are the most common small business loans through approved lenders and guaranteed by the government. Qualified businesses can get funding with longer loan repayment terms and interest rates. The SBA is striving to offer more funding options to minority-owned businesses, but it offers most of its loans to White-owned businesses. The SBA reports that in 2020, 47% of SBA 7(a) loans went to White business owners, while 23% went to Asian business owners, 6% to Hispanic and just 3% to Black. As with all SBA loans, it’s a time-consuming application process, and requirements are difficult to achieve. You can borrow a maximum of $5 million with an SBA 7(a) loan. They are good for one-time, long-term financing.
SBA Community Advantage Loans
For minority-owned businesses that may not qualify for traditional small business loans, community advantage loans through the U.S. Small Business Administration may be an option. Again, the government does not loan the money but works with mission-based lenders on loans up to $250,000. To be eligible for the loan, you must operate a for-profit business in underserved markets. In addition, you should have a good credit score but may not need to offer collateral or show long-term profitability.
SBA 8(a) Business Development Program
If you are searching for bids on government contracts, the SBA 8(a) business development program may be right for your small business. It’s not a loan program, but rather the SBA 8(a) business development program is a certification that can help minority-owned businesses improve their chances of winning the bid on government contracts. To qualify, your company must be 51% controlled by “socially and economically disadvantaged individuals,” including minorities, women, and military veterans.
Community Development Financial Institution (CDFI) Loans
Community Development Financial Institutions, or CDFIs, are community-based organizations with a mission to expand economic opportunities and provide financial assistance to individuals and businesses that banks and traditional financial institutions overlook. These are usually in low-income or rural areas, as well as underserved communities. CDFIs aren’t easy to find, but they are eager to assist minority-owned businesses. Many CDFIs offer startup loans to minority small businesses through the SBA microloan program. To be eligible, the main mission of your business must be to promote community development.
Union Bank Business Diversity Lending Program
The Union Bank business diversity lending program is designed to provide women-, minority-, and veteran-owned businesses the funding they need to grow with simpler loan terms and qualifications than some lenders can offer new businesses. To be eligible, businesses must be 51% owned and actively managed by women, minorities, veterans, or a combination of the three. You can choose among fixed-rate loans, secured loans, unsecured loans, and real estate financing. Business lines of credit are available as well.
Accompany Capital
If you are new to the United States and hope to start a business in or near New York City, you may qualify for financing from Accompany Capital. It provides refugees, immigrants, women and others in need in New York City with microloans for small businesses and financial and business management education.
USDA Business Loans
New businesses are eligible for USDA business loans. Guaranteed by the U.S. Department of Agriculture, USDA business and industry loans are made by banks, credit unions and other lenders to businesses in rural areas. While you do not need to be a minority business owner to qualify, you must have a U.S. citizenship or permanent residency status to be eligible for USDA business loans. Other qualifications are stricter for USDA loans than other types of small business loans designed for minority-owned businesses. For example, you need to have a good credit score of about 680 on a scale of 300 to 850, and collateral is usually required.
Business Consortium Fund Loan
The Business Consortium Fund has been providing loans to minority-owned businesses since 1987. To be eligible to apply for financing and other services for entrepreneurs, you must be certified by the National Minority Supplier Development Council (NMSDC) as a member of systematically excluded communities of color (Asian, Black, Hispanic and Native American).
Other Funding Options for Minority-owned Businesses
In addition to more traditional business loans, there are other funding options for minority-owned businesses. It’s important to study the eligibility requirements before you pursue these options.
Grants
Grants are vastly different from business loans in that they never need to be paid back. Minority-owned businesses may qualify for grants from local community organizations and the government. However, they aren’t easy to find, and options for grants vary by state. Be prepared for the comprehensive application process if you seek grant money for your minority-owned business.
Nonprofit Loans
You may be able to get a nonprofit loan if your minority-owned business qualifies as a nonprofit organization or charity. Nonprofit loans are hard to get because lenders may scrutinize the fact that you are not structured to earn a profit like other small businesses, banks, and other lending institutions are accustomed to financing. Lenders may see your organization as a risky investment. If you are approved for a nonprofit loan, you will likely need to offer collateral. If you seek a nonprofit loan, search for a lender specializing in loans to nonprofits and charities.
Traditional Banks and Lenders
Traditional banks and lenders, such as credit unions, may offer loans for minority-owned businesses. Still, it may be tough to qualify unless you have been in business for more than two years and can show positive cash flow. You may also need a written business plan and be able to prove creditworthiness. Loan terms and interest rates may be better than other lenders can offer, but the application process is lengthy, and it can take weeks to receive the funding you need for your business.
Online Lenders
Online lenders are much more flexible than traditional banks and credit unions when it comes to providing financing to small businesses, whether they are startups or existing businesses. Minority-owned businesses may qualify easier for funding from online lenders simply because the requirements tend to be less strict. For instance, you may be able to get the funding you need even if you have bad credit or cannot show strong sales since you are just starting your small business. In addition, online applications are easier than traditional loan applications, and funding is usually available quickly. For that convenience, you may pay a higher interest rate since the lender assumes more risk by loaning money to a new business.
